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Smulyan: Retrans or Bust

This time they really mean it. Major TV-station groups are going to generate a second revenue stream—working with cable or warring against it.

Jeff Smulyan, head of the Emmis TV group, told investors last week that it is time for broadcasters to squeeze cable operators for retransmission-consent fees.

"The battle isn't really between networks and affiliates. It's between those involved in the over-the-air transmission-system distributors and those who take our signal and charge the American people for it," Smulyan said at the UBS Warburg conference in New York.

"This industry is waking up," he added.

Sinclair Broadcasting CEO David Smith was even more combative. "Given what the satellite companies pay us today, the only issue is what day does this event take place. We have all long argued that we should be paid, especially given that we are the dominant deliverer of eyeballs in the marketplace."

Smith bragged that, if he could secure cooperation of two or three other stations in a smaller market, he would suffer minimal financial pain by taking the stations off the local cable system until they agreed to pay.

"The driver of this is going to be our industry having the nerve to say, 'You can't have it for free any more; there's a price to be paid for it.'"

By law, cable operators must receive permission from the local TV stations before retransmitting their signals. When that requirement became law in 1992, broadcasters believed they could negotiate for carriage fees from operators just as cable networks do. But having to negotiate individually against local cable monopolies, broadcasters found they lack sufficient leverage to demand cash.

The major media companies, though, leveraged their retransmission rights into MSO support for new cable programming services. ABC launched ESPN 2 that way, while NBC and Microsoft launched news channel MSNBC, and News Corp. developed FX.

And some broadcasters believe those initiatives crushed any hope they had of getting cash for their broadcast signals. "That really created a great value shift" away from broadcast television to cable TV, explained LIN Television Chairman Gary Chapman. "It undermined our ability to get paid for our broadcast signals."

Cable executives say they've seen no sign in recent discussions with broadcasters that relations were going to turn more combative. They say adamantly that they can offer some accommodations to broadcasters but won't pay cash for retransmission consent.

"Individual negotiations are going on," said Mike Willner, president of Insight Communications and chairman of the National Cable Telecommunications Association. In addition to distribution of broadcasters' cable networks, he said, discussions center on cable carriage of broadcasters' digital signals. "I believe the broadcast industry and the cable industry have more to make working with each other than against each other."

The CEO of another cable operator was more blunt: "I think they're full of shit." Blaming the hostile talk on the switch to digital broadcasting, he added, "They expect more from us because they asked Washington for something they didn't want and got it."

Smulyan and News Corp. President Peter Chernin are two of the leaders of an ad hoc group that has been analyzing the TV-station business and looking for retransmission-consent cash and other "second revenue streams" to supplement advertising dollars. That committee commissioned an economic report that was to have been reviewed by the Television Operators Caucus last week.

The group has discussed several ways of improving broadcasters' chances of getting retrans fees. Among them: asking Congress or the Justice Department for an antitrust exemption that would allow TV stations in a market to band together in negotiations with cable; setting up third parties that would represent broadcasters in retrans talks; and amending the law to create statutory retrans fees for broadcasters.

Broadcasters don't believe that retrans cash is their only route to a second revenue stream. Broadcasters in a market could also pool their digital spectrum and broadcast multiple channels of TV in competition with cable and satellite, Smulyan said.

Some broadcasters suggested to him that they band together to buy DirecTV. "It's not the worst idea."